 Hello and welcome to Newsclick. Today we have with us Prof. Jyothi Ghosh to discuss the food crisis and the food prices that have been going up again. Jyothi, the food prices seem to be rising again. 2011 prices have been consistently high. What is the impact that it is having in terms of the global poor, in terms of the third world countries and generally the impact on the people who can least afford the rising price of food? Well, it's actually a horrifying impact because what has been happening in the last say four years when prices have been very volatile, in periods of globally rising prices, there is an almost direct transmission of this rising price to food prices in the developing world. And in periods of falling prices, you don't find that downward movement. It's the first time that we are seeing in the last decades that the number of people hungry really have gone up by a huge number. It's almost 25% increase. Well, this is in fact just what we're estimating. We still don't have the hard data to know what has happened to consumption patterns. But it is quite evident that there is going to be, I imagine, a very, very significant impact on nutrition. And when we get the actual data in terms of both the nutrition, you know, how much people are eating in terms of calories and the outcome indicators, I think things are going to be much worse than people imagine. If you look at the consumption baskets, then about, say, 10% to 12% of the basket of goods in an advanced country goes for food. But here it can be as high as anything between 50% to 70%. So actually the effect would be much, would really be far higher here. For the poorest, it will be between 50%. There is the bottom two deciles or three deciles. It will be between 50% to 70%. And even, well, let's say for the next group, which is everybody below the top 20%, it will be between 40% and 50%, which is huge. And what we have found even little later that we have from the latest national sample survey for India is that there is a significant increase in the unit value of what people are spending for essentials, wheat, rice, dal, sugar, all these essential items. If we look at the price rise that has taken place, there are three arguments that are given. One, of course, is the imbalance between the demand and the supply, arguing that Indians and the Chinese are eating too much. No, that's ridiculous because, in fact, if you look at it globally, Chinese and Indians are eating less. The consumption of most of the basic food items for which the price has zoomed up, like wheat and rice, has actually fallen. The aggregate consumption has fallen in China and India. But more generally, if you look at global demand and supply, there is really no relationship between the increase in food prices and the behavior of demand and supply. Broadly, they have been more or less in sync. Global demand increases by maybe 4% or 5%. Global supply increases by 5% or 6%. So there should be no major change in price if you're looking in terms of the FAO data on supply and utilization. So what explains this kind of volatility in the market and also almost tripling of the prices over the last four or five years? Yes. Well, you know, what we found is that prices doubled or tripled between January 2007 and mid-2008. Then they fell again to almost the same level of January 2007. Then they've been rising again. We have now had 13 months of very, very high prices. Very prolonged period. It's a plateau where we have crossed the earlier peak of June 2008. And this, as I said, is having this huge impact globally across the world. But it's not related to real demand and supply. There's one supply factor which is important, which is the diversion to biofuels. Subsidies on biofuels in the United States and in the European Union have meant something like one-third of May's output and half of May's imports for the European Union. And about 40% of May's output in the U.S. is diverted to biofuel protection. But... Couple of the oil prices, two in some sense, the food prices, through the biofuel protection. That's part of the reason. But the other thing, of course, oil prices directly affect food prices because oil enters directly into cultivation because it's the energy, the input cost, the transport of food. So when oil prices go up, food prices will also go up. It enters directly. But both oil and fuel, food, are actually affected by another third factor which has really been, in a sense, the dominant reason for the price increase. That is the financial activity in global commodity markets. Can you explain a little bit because all of us thought that speculation is something that is inherent in the commodity trading. So what's new in this? No, what's very new is that we now have in the commodities market the activity of financial speculators who have no interest whatsoever in the physical commodity. Earlier in commodity markets, yes, of course there was speculation. But globally, in fact, in the international commodity markets, that speculation was confined to those who have an interest in the physical holding of the commodity. So large grain traders and people like that, agencies like that would be involved in that. They are not a large part of the futures market in the global trade was really because of hedging because you will either be needing, let's say you are McDonald's, you need lots of potato chips. So you hedge for potatoes six months from now. Or you are Kage, you're a grain trader. So you hedge for your purchases six months from now. What we found now especially after 2006 is the very active involvement of financial companies that have absolutely no interest in the physical holding of the commodities. This was enabled by financial regulation in the US which began in 2000, the Commodity Futures Modernization Act. It brought in the possibility of purely financial players entering commodity markets through a lot of, I won't go into the details, but there were various measures that allowed them to enter. Now when the housing market was active, there was less incentive to get in to all these other new things. But when the housing market started slowing down, they are looking for other avenues, they enter commodities. And that pushes up the price, that makes commodities even more attractive. So more and more people enter. From about 2000 you find that there's a big increase in what is called the counter activities. These over the counter activities double tripled and they really track the futures price which then starts leading the spot price in all these major things. Normally a purely hedging market would be characterized by what is called backwardation. The future price is lower than the spot price. Increasingly we have found during that period of price spike up to June 2008 and now that we have contango. The futures price is higher than the spot price. It's driving up the spot price. And that's because in a sense there's an expectation of future price increase and there's a speculative activity which is driving up the futures market. The argument that is also given, it's the index traders rather than the original grain traders or the grain speculators who really in some sense oil the futures market. But the index traders only buy long and therefore there's only an upward pressure on the market that is created by the index traders. And this is one of the reasons that you have what you call the contango. That's right and well as index traders are part of what I've said the purely financial involvement in the market which is not interested in the physical holding of the commodity. Now the world is more complicated today than it was say three years ago when index traders I could say yes you know they've dominated and they are the reason. Because increasingly as financial players have become aware that some regulation is on its way. You know the U.S. Financial Reform Bill Dodd-Frank has got some measures in to control this kind of activity. It's stopping OTC trading. The EU regulation is also planning to stop over the counter trading and various other measures. So now in fact they are moving into other kinds of ways so that increasingly the kind of financial involvement is changing. So it's not a very clear picture it's not anymore just index traders that are driving it up. Now you have a range of others who even have the grain companies doing financial trading because there's a lot of profit to be made in it. So why not? So Glencore and Cargill are doing financial activity even though they are really commodity traders. Are we seeing in some sense a replay of the housing market that more and more complex instruments being created which effectively push up the cost of the, pushed up the cost of the housing market and now pushing up the commodity prices? Yes, yes but it's worse because this has a direct bearing on people's lives across the world. The housing market just affected houses in the United States and households in the United States. Here you're talking about the price of essentials. I mean food and fuel enter into everything and so what you're talking about is an artificial raising of prices of essential commodities that then get transmitted globally across the world and affect the poorest people. You've argued in one of your pieces that while the prices rise, the domestic price rises but when it falls it doesn't fall which is what you said a little while back. The other issue that comes up is can the countries themselves that they can do something about the domestic prices of countries like India? Absolutely. You see in fact that's what is so interesting is that there isn't one pattern across the world. There are some countries that have managed it much better than others. In China for example, yes there has been food inflation. Pork is the big one but I'm leaving that out for the time being but it is still lower than the other inflation. So in China the inflationary forces are slightly different. It's not led by food inflation. In India it's very clear food inflation has dominated and we have been much less able to prevent that global impact hitting us. There's no reason why that should happen because we are in a position to be able to control domestic food prices. We are in a position where we need not import unless absolutely required, where we can go in for measures that somehow protect both domestic farmers and producers and consumers from the global price. So we should be able to have less of an impact of the price increase. Unfortunately our government seems to have decided that we should be affected by the global forces. We should allow the global forces to impact us. I was reading in the paper today that one of our economic advisers has said that we cannot afford to let global fuel prices and food prices go up and not impact the Indian price. The Indian price has to be affected. My comment when I hear things like this is that if all these global prices have to be reflected in Indian prices, what about the price of labour? Wages. Wages. Which of course is supposed to be different from global prices. Which is very different. Very different. From the global price. Also an interest in becoming food secure. So investments in action production of food domestically. Yes. But you know again it's not that nothing can be done in situations like this. Malawi is a classic example. Malawi was another one of those typical African countries that was a basket case. It was always in trouble always getting into famines having to import food etc. Under world bank pressure IMF and world bank it actually got rid of its strategic grain reserve. What we would call our food stocks. It got rid of it because they said what's the need you'll just import when you need it and export the rest. All of that nonsense. So it got rid of it. The next year it had a massive famine. Huge devastation, lot of you know suffering massive increase in prices, hunger, deaths etc. The world bank IMF and everybody told them oh it's because of a failure of governance. The usual thing it's because of corruption and crony whatever and it's all your fault. Thereafter the Malawi regime which is not a great regime in many respects but they took a conscious policy to forget the world bank advice. To give subsidies on inputs on fertilizer etc. to their farmers. And to somehow raise small holder agriculture. Now they were extremely successful once they actually decided to forget the world bank advice. They became the most rapidly increasing agricultural production in the region. During the last period of food price increase they were exporting to their neighbouring countries and they were managed to sustain very low domestic price increase for their own consumers. Thank you. That has been very interesting as we look at the global markets.